10-Q 1 dec.txt AIR T, INC. 12/31/03 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended December 31, 2003 Commission File Number 0-11720 Air T, Inc. (Exact name of registrant as specified in its charter) Delaware 52-1206400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Post Office Box 488, Denver, North Carolina 28037 (Address of principal executive offices) (704) 377-2109 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act). Yes No X APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,726,320 Common Shares, par value of $.25 per share were outstanding as of February 12, 2004 AIR T, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three and nine-month periods ended December 31, 2003 and 2002 (Unaudited) 3 Condensed Consolidated Balance Sheets at December 31, 2003 (Unaudited) and March 31, 2003 4 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 2003 and 2002 (Unaudited) 5 Condensed Consolidated Statement of Stockholders' Equity and Other Comprehensive Loss at December 31, 2003 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Item 4. Controls and Procedures 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 Exhibit Index 21 Officers' Certifications 22-25 AIR T, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended December 31, December 31, 2003 2002 2003 2002 Operating Revenues: Overnight air cargo $10,050,669 $ 7,241,762 $25,850,443 $21,580,247 Ground equipment 2,929,464 3,992,789 11,808,829 9,026,966 12,980,133 11,234,551 37,659,272 30,607,213 Operating Expenses: Flight-air cargo 4,096,976 3,611,089 10,951,845 10,455,404 Maintenance-air cargo 4,174,526 2,487,017 9,709,612 7,341,164 Ground equipment 2,320,453 3,090,356 8,970,654 7,341,304 General and administrative 1,885,169 1,749,671 5,634,690 5,227,832 Depreciation and amortization 132,886 136,461 408,263 430,482 12,610,010 11,074,594 35,675,064 30,796,186 Operating Income (Loss) 370,123 159,957 1,984,208 (188,973) Non-operating (Income) Expense: Interest 14,909 13,269 (75,249) 23,856 Cash surrender value of life insurance (123,000) (6,000) (137,500) (18,000) Deferred retirement expense 5,250 5,250 15,750 15,750 Impairment of marketable securities - 13,810 - 161,197 Investment income and other (20,496) (43,393) (86,799) (126,988) (123,337) (17,064) (283,798) 55,815 Earnings (Loss) From Continuing Operations Before Income Taxes 493,460 177,021 2,268,006 (244,788) Income Tax provision (Benefit) 184,654 75,207 903,137 (82,926) Earnings (Loss) From Continuing Operations $ 308,806 $ 101,814 $ 1,364,869 $ (161,862) Loss From Discontinued Operations, Net of Income taxes (78,786) (64,451) (427,643) (325,448) Net Earnings (Loss) $ 230,020 $ 37,363 $ 937,226 $ (487,310) Basic and Diluted Earnings (Loss) Per Share: Continuing Operations $ 0.11 $ 0.04 $ 0.50 $ (0.06) Discontinued Operations (0.03) (0.03) (0.16) (0.12) Total Basic and Diluted Net Earnings (Loss) Per Share $ 0.08 $ 0.01 $ 0.34 $ (0.18) Weighted Average Shares Outstanding: Basic 2,726,320 2,726,320 2,726,320 2,726,320 Diluted 2,747,928 2,726,320 2,730,717 2,726,320 See notes to condensed consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 MARCH 31, 2003 (Unaudited> ASSETS Current Assets: Cash and cash equivalents $ 474,243 $ 79,715 Marketable securities 874,612 1,057,042 Accounts receivable, less allowance for doubtful accounts of $359,927 at December 31, 2003 and $449,358 at March 31, 2003 3,962,096 6,239,144 Notes receivable-current 33,452 - Income taxes receivable 16,825 - Inventories, net 8,469,642 6,275,288 Assets held for sale - 1,950,000 Deferred tax asset 1,132,161 1,036,998 Prepaid expenses and other 128,964 129,029 Total Current Assets 15,091,995 16,767,216 Property and Equipment 7,202,636 7,092,032 Less accumulated depreciation (5,097,199) (4,788,779) Property and Equipment, net 2,105,437 2,303,253 Deferred Tax Asset 580,180 1,096,883 Intangible Pension Asset 76,647 219,862 Other Assets 1,164,145 940,479 Notes Receivable-long-term 289,921 - Total Assets $ 19,308,325 $21,327,693 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 3,984,812 4,436,291 Accrued expenses 2,340,592 1,691,341 Billings in excess of costs and estimated earnings on uncompleted contracts 98,318 760,979 Income taxes payable - 180,278 Current portion of long-term debt and obligations 110,682 113,130 Total Current Liabilities 6,534,404 7,182,019 Capital Lease Obligations (less current portion) 55,197 50,070 Long-term Debt (less current portion) 103,767 2,345,910 Deferred Retirement Obligations (less current portion) 1,587,275 2,138,712 Stockholders' Equity: Preferred stock, $1 par value, authorized 50,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,726,320 and 2,726,320 shares issued and outstanding 681,580 681,580 Additional paid in capital 6,863,898 6,863,898 Retained earnings 3,466,782 2,529,556 Accumulated other comprehensive income (loss) 15,422 (464,052) 11,027,682 9,610,982 Total Liabilities and Stockholders' Equity $ 19,308,325 $ 21,327,693 See notes to condensed consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended December 31, 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 937,226 $ (487,310) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Change in accounts receivable and Inventory reserves 6,270 137,921 Depreciation and amortization 408,263 520,351 Increase in cash surrender value of life insurance (117,000) - Deferred tax provision (benefit) 421,540 (30,511) Loss on disposal of assets and impairment of investments - 130,716 Net periodic pension cost 218,571 68,997 Change in assets and liabilities which provided (used) cash: Accounts receivable 2,366,479 (1,029,915) Income taxes receivable (16,825) - Inventories (2,322,715) 718,228 Prepaid expenses and other (29,974) (61,515) Accounts payable (751,479) (77,745) Accrued expenses 603,370 317,803 Billings in excess of costs and estimated earnings on uncompleted contracts (662,661) - Income taxes payable (180,278) (521,550) Total adjustments (56,439) 328,270 Net cash provided by (used in) operating activities 880,787 (159,040) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets-discontinued operations 1,550,000 - Proceeds from sale of marketable securities 325,575 - Proceeds from sale of equipment - 140,000 Capital expenditures (141,297) (242,731) Net cash provided by (used in) investing activities 1,734,278 (102,731) CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings on line of credit (2,220,537) 632,691 Payment of cash dividend - (325,854) Proceeds from exercise of stock options - 5,500 Net cash (used in) provided by financing activities (2,220,537) 312,337 NET INCREASE IN CASH & CASH EQUIVALENTS 394,528 50,566 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 79,715 31,770 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 474,243 $ 82,336 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 78,396 $ 309,640 Income taxes 474,901 262,019 SUMMARY OF SIGNIFICANT NON-CASH INFORMATION: Note receivable from sale of assets-discontinued operations $ 323,373 $ - Change in fair value of derivatives 51,640 20,998 Increase in fair value of marketable securities 144,475 42,622 See notes to condensed consolidated financial statements.
AIR T, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Accumulated Other Additional Comprehensive Total Common Stock Paid-In Retained Income Stockholders' Shares Amount Capital Earnings (Loss) Equity Balance, March 31, 2003 2,726,320 $681,580 $6,863,898 $2,529,556 $(464,052) $ 9,610,982 Comprehensive Income: Net earnings 937,226 Minimum Pension Liability 283,359 Other Comprehensive Income: Unrealized gain on securities 144,475 Change in fair value of derivatives 51,640 Total comprehensive income 1,416,700 Balance, December 31, 2003 2,726,320 $681,580 $6,863,898 $3,466,782 $ 15,422 $11,027,682 See notes to condensed consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. Financial Statements The Condensed Consolidated Balance Sheet as of December 31, 2003, the Condensed Consolidated Statements of Operations for the three and nine- month periods ended December 31, 2003 and 2002, the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 2003 and 2002 and the Condensed Consolidated Statement of Stockholders' Equity and Other Comprehensive Income (Loss) have been prepared by Air T, Inc. (the Company) without audit. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, cash flows and equity position as of December 31, 2003, and for prior periods presented, have been made. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2003. The results of operations for the period ended December 31 are not necessarily indicative of the operating results for the full year. B. Income Taxes The tax effect of temporary differences, primarily asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying December 31, 2003 and March 31, 2003 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. The income tax provision (benefit) from continuing operations for the respective nine-months ended December 31, 2003 and 2002 differ from the federal statutory rate primarily as a result of state income taxes and permanent timing differences. C. Net Earnings (Loss) Per Share Basic earnings (loss) per share has been calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings (loss) per share, shares issuable under employee stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. For the three-month and nine-month period ended December 31, 2002 all outstanding stock options were anti- dilutive. The computation of basic and diluted earnings (loss) per common share is as follows: Three Months Ended Nine Months Ended December 31, December 31, 2003 2002 2003 2002 Net earnings (loss) $ 230,020 $ 37,363 $ 937,226 $ (487,310) Basic and Diluted Earnings (Loss) Per Share: Continuing Operations $ 0.11 $ 0.04 $ 0.50 $ (0.06) Discontinued Operations (0.03) (0.03) (0.16) (0.12) Total Basic and Diluted Net Earnings (Loss) Per Share $ 0.08 $ 0.01 $ 0.34 $ (0.18) Weighted Average Shares Outstanding: Basic 2,726,320 2,726,320 2,726,320 2,726,320 Plus: Incremental shares from stock options 21,608 - 4,397 - Diluted 2,747,928 2,726,320 2,730,717 2,726,320 7 D. Inventories Inventories consist of the following: December 31, 2003 March 31, 2003 Aircraft parts and supplies $ 1,769,432 $ 2,088,315 Aircraft equipment manufacturing: Raw materials 3,834,278 2,595,448 Work in process 1,686,429 745,409 Finished goods 2,369,165 1,940,077 Total Inventory 9,659,304 7,369,249 Reserves (1,189,662) (1,093,961) Total, net of reserves $ 8,469,642 $ 6,275,288 Recent Accounting Pronouncements The FASB has issued SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was effective for the Company beginning April 1, 2003. Adoption of SFAS No. 143 did not have a material effect on the Company's financial position and results of operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and amends Accounting Principles Bulletin (APB) No. 30 "Reporting the Results of Operations-Discontinued Events and Extraordinary Items". Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity. SFAS No. 144 was effective for the Company beginning April 1, 2002. The effect of the adoption of SFAS No. 144 on management's plan to discontinue the operations of MAS is reflected in the Company's condensed consolidated statements of financial position and results of operations and is detailed in Note H Discontinued Operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements, initial recognition and initial measurement provisions of this Interpretation are currently effective and did not have a material effect on our financial position and results of operations for the three and nine months ended December 31, 2003. The Company's ground equipment subsidiary warranties its products for up to a two-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known. As of December 31, 2003 the Company's warranty reserve amounted to $127,000. 8 Product warranty reserve activity during the nine-months ended December 31, 2003 is as follows: Balance at 3/31/03 $116,000 Additions to reserve 111,000 Use of reserve (100,000) Balance at 12/31/03 $127,000 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to continue to account for its stock-based compensation under the provisions of Accounting Principles Bulletin No. 25. The Company has applied the fair value recognition provisions of SFAS NO. 123 to its stock-based compensation and has determined that there is no effect on proforma net income and proforma earnings per share for the three-month and nine-month periods ended December 31, 2003 and 2002 respectively. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This Interpretation requires that variable interest entities created after January 31, 2003, and variable interest entities in which an interest is obtained after that date, be evaluated for consolidation into an entity's financial statements. For variable interest entities created or acquired prior to that date, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 31, 2003. The adoption of FIN 46 is not expected to have an impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 is effective for the Company beginning July 1,2003, although the FASB has recently proposed that implementation of certain provisions of SFAS NO. 150 be postponed indefinitely. The Company has determined that the adoption of SFAS No. 150 will not have an impact on the Company's financial position or results of operations. Derivative Financial Instruments As required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", the Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The Company is exposed to market risk, such as changes in interest rates. To manage the volatility relating to interest rate risk, the Company may enter into interest rate hedging arrangements from time to time. The Company does not utilize derivative financial instruments for trading or speculative purposes. In May 2001, the Company entered into two interest rate swaps with notional amounts of $2.4 million, and $2 million respectively. These agreements were originally entered into at respective interest rates of 6.97% and 6.5%. On July 31, 2002 the Company elected to unwind its $2,000,000 (6.5%) revolving credit line swap in consideration for $58,750, the fair-market- value termination fee as of that date. On October 30, 2003, the Company terminated its remaining credit line swap for $97,500, the fair-market-value termination fee as of that date. The $88,636 included in accumulated other comprehensive income (loss) at date of termination will be ratably amortized into interest expense over the remaining term of the Company's credit line. G. Financing Arrangements On August 31, 2003 the Company amended its $7,000,000 secured long-term revolving credit line to extend its expiration date to August 31, 2005. 9 The revolving credit line contains customary events of default, a subjective acceleration clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. Under the provisions of the revolving credit line, the sale of MAS, as described in Note H., would be considered an event of default. The Company has obtained a waiver for this covenant. As of December 31, 2003, the Company was in compliance with all of the restrictive covenants. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement, which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. The credit facility is secured by substantially all of the Company's assets. Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at December 31, 2003 was 1.11%. At December 31, 2003 and March 31, 2003, the amounts outstanding against the line were $104,000 and $2,217,000, respectively. At December 31, 2003, $2,116,000 was available under the terms of the credit facility. The Company has classified its outstanding bank debt of $104,000 as long- term as of December 31, 2003 to reflect the terms included under the amendment signed on August 31, 2003. H. Discontinued Operations During the fourth quarter of fiscal 2003, Company management agreed to a plan to sell the assets of Mountain Aircraft Services, LLC (MAS) and to discontinue the operations of the Company's aviation service sector business. The Company entered into a letter of intent on June 19, 2003 to sell certain assets and the business operations of MAS to an investor group which included former management of MAS, for consderation of $1,950,000 and closed on the transaction on August 14, 2003. In conjunction with the above sale, the Company agreed to indemnify the buyer and its affiliates with respect to certain matters related to contractual representations and warranties and the operation of the business prior to closing. Although no assurances can be made, the Company does not believe the indemnities provided will have a material effect on its financial condition or results of operations. Under the terms of the agreement signed on August 14, 2003, the Company also entered into a three-year consignment agreement granting the buyer an exclusive right to sell the remaining $789,000 net value of MAS inventory included in the Company's condensed consolidated balance sheet as of December 31, 2003. Upon termination of the consignment agreement the buyer will return all unsold inventory to the Company. Accordingly, the accompanying condensed consolidated financial statements reflect the sale of certain MAS assets and reclassify the net operations of MAS as discontinued operations, net of tax, for all periods presented. A summary of the assets held for sale at December 31, 2003 and March 31, 2003 is as follows: A summary of the operating results of the discontinued operations for the nine-months ended December 31, 2003 and 2002 is as follows: 2003 2002 Revenue $ 2,657,752 $ 4,946,843 Operating Loss $ (503,054) $ (207,126) Loss before income taxes $ (701,054) $ (533,522) Income tax benefit 273,411 208,074 Net loss $ (427,643) $ (325,448) 10 I. Segment Information The Company operates three subsidiaries in two continuing business segments. Each business segment has separate management teams and infrastructures that offer different products and services. During the fourth quarter of fiscal 2003, Company management agreed to a plan to sell the assets of MAS and to discontinue the operations of the Company's aviation service sector business. On August 14, 2003, the Company closed on its transaction to sell certain assets and the business operations of MAS. Therefore, to present the two periods ended December 2003 and 2002 comparably, the operations of MAS and the consigned inventory, as discussed in Note H. Discontinued Operations, are not presented in the segment and Identifiable asset information below. The subsidiaries with continuing operations have been combined into the following two reportable segments: overnight air cargo and ground equipment. The overnight air cargo segment encompasses services provided to one customer, Federal Express Corporation, and the ground equipment segment encompasses the operations of Global Ground Support, LLC. Segment data is summarized as follows: Three months ended Nine months ended December 31, December 31, 2003 2002 2003 2002 Operating Revenues Overnight Air Cargo $ 10,050,669 $ 7,241,762 $25,850,443 $21,580,247 Ground Equipment 2,929,464 3,992,789 11,808,829 9,026,966 Total $ 12,980,133 $11,234,551 $37,659,272 $30,607,213 Operating Income (Loss) Overnight Air Cargo $ 1,204,673 $ 498,707 $ 3,210,849 $ 1,808,217 Ground Equipment (97,784) 262,932 915,596 (306,325) Corporate (1) (736,766) (601,682) (2,142,237) (1,690,865) Total $ 370,123 $ 159,957 $ 1,984,208 $ (188,973) Depreciation and Amortization Overnight Air Cargo $ 55,624 $ 56,183 $ 166,100 $ 185,926 Ground Equipment 35,940 43,757 118,007 137,941 Corporate 41,322 36,521 124,156 106,615 Total $ 132,886 $ 136,461 $ 408,263 $ 430,482 Capital Expenditures, net Overnight Air Cargo $ 36,014 $ 4,996 $ 68,162 $ 22,748 Ground Equipment 22,837 11,779 38,385 106,663 Corporate 11,405 32,989 34,750 109,277 Total $ 70,256 $ 49,764 $ 141,297 $ 238,688 As of December 31, 2003 March 31, 2003 Identifiable Assets Overnight Air Cargo $ 4,065,598 $ 4,130,676 Ground Equipment 10,727,378 8,615,032 Corporate 3,276,884 4,684,070 Total $ 18,069,860 $ 17,429,778 (1) Includes income from inter-segment transactions 11 J. Resignation of Executive Officer Effective December 31, 2003, an executive officer and director of the company resigned his employment with AirT. In consideration of approximately $300,000, payable in three installments over a one-year period starting January 12, 2004, the executive agreed to forgo certain retirement and other contractual benefits for which the company had previously accrued aggregate liabilities of amounting to approximately $715,000. The above mentioned cancellation of contractual retirement benefits reduced recorded liabilities by $715,000. The difference between the recorded liability and ultimate cash payment of $300,000 required the recording of a $305,000 reduction in actuarial losses, recorded in Other Comprehensive Loss, a $90,000 reduction in intangible assets and a net $20,000 reduction in executive compensation charges included in the statement of operations. After accounting for the effect of income taxes, these transactions increased the company's reported net earnings from continuing operations by $12,000. The company also agreed to buyback purchase from the former executive officer 118,480 shares of AirT common stock held by him (representing approximately 4.3% of the outstanding shares of common stock at December 31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price). The stock repurchase will take place in three installments over a one-year period, starting January 12, 2004, and will total approximately $538,000. The repurchase of the former executive's stock will be recorded in the period that the repurchase occurs as treasury stock transactions. K. Commitments and Contingencies Global and one of its employees are defendants in a lawsuit filed in March 2002 in the United States District Court for the District of Columbia, Catalyst & Chemical Services et al v. Terex, et al. In this action, the plaintiffs allege that they provided to Global and the employee certain trade secrets regarding aircraft de/anti-icing systems that were then disclosed by Global and the employee to third parties. The plaintiffs allege misappropriation of trade secrets, breach of contract and violation of the federal Racketeer Influenced and Corrupt Organizations Act and seek monetary damages. The Company and its employee have filed an answer in this action denying all liability. Upon Global's motion, the court has dismissed the plaintiff's claims under the Racketeer Influenced and Corrupt Organizations Act. Recently the plaintiffs amended the complaint to add a patent infringement claim, which appears to involve the same materials and information that constitute the alleged trade secrets. Global has not yet responded to the newly-filed patent claim. The Company does not believe that the action has any merit and intends to defend the lawsuit vigorously. In November 2002, Global and the Company filed suit in North Carolina state court against affiliates of the plaintiffs in the Catalyst & Chemical Services et al v. Terex, et al action alleging defamation. This action has been +moved to, and is pending before, the United States District Court for the District of Columbia. The Company is currently aware of certain intellectual property, personal injury and environmental matters, some of which involve pending or threatened lawsuits. If adversely decided, management believes the results of these pending or threatened lawsuits would not have a material adverse effect on the Company. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Continuing Operations. Overview The Company's most significant component of revenues, which accounted for 68.6% of revenues for the nine months ended December 31, 2003, was generated by its air cargo subsidiaries, Mountain Air Cargo, Inc.(MAC) and CSA Air, Inc.(CSA). MAC and CSA are short-haul express air freight carriers, which provide services to one customer, Federal Express Corporation (the Customer). MAC and CSA's revenues contributed approximately $25,850,000 and $21,580,000 to the Company's revenues for the nine-month periods ended December 31, 2003 and 2002, respectively. The increase in revenues was primarily attributed to increased cargo and maintenance services, related to the Customer's aircraft fleet modernization and route expansion, provided during the current period. Under the terms of the dry-lease service agreements, which currently covers approximately 98% of the revenue- generating aircraft operated, the Company passes through to its Customer certain cost components of its operations without markup. The cost of fuel, flight crews, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the Customer as cargo and maintenance revenue, at cost. Separate agreements cover the four types of aircraft operated by MAC and CSA-Cessna Caravan, Fokker F-27, ATR 42 and Short Brothers SD3-30. Cessna Caravan, Fokker F-27 and ATR 42 aircraft (a total of 99 aircraft at December 31, 2003) are owned by and dry-leased from the Customer, and Short Brothers SD3-30 aircraft (two aircraft at December 31, 2003) are owned by the Company and operated under wet-lease arrangements with the Customer. Pursuant to such agreements, the Customer determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by the Company. Agreements are renewable annually and may be terminated by the Customer at any time upon 15 to 30 days' notice. The Company believes that the short term and other provisions of its agreements with the Customer are standard within the air freight contract delivery service industry. The Company is not contractually precluded from providing such services to other firms, and has done so in the past. Loss of its contracts with the Customer would have a material adverse effect on the Company. Global Ground Support, LLC (Global), another subsidiary of the Company, manufactures, services and supports aircraft deicers and other specialized equipment on a worldwide basis. Global's revenue contributed approximately $11,809,000 and $9,027,000 to the Company's revenues for the nine-month periods ended December 31, 2003 and 2002, respectively. The increase in revenues in 2003, which took place during the first and second quarters, was primarily related to a current period increase in sales of mobile deicers and a large scale airport contract. Except for the second quarter of fiscal 2004, the business of Global had been adversely affected by reduced orders from commercial airlines and aviation-related companies. The decrease in orders, which started in early 2001, declined further after September 11, 2001. Global, which also derives a significant portion of its revenue from sale of products for military applications, experienced temporary declines in orders for certain military programs due to funding delays during fiscal 2003 and the third quarter of fiscal 2004. On January 23, 2004 the Company received a three-year extension to its existing four-year supply agreement with the U.S. Air Force. In connection with the extension, the Air Force placed a $11.3 million order, to be completed over the next three to four quarters. The Company operates three subsidiaries in two continuing business segments. Each business segment has separate management teams and infrastructures that offer different products and services. The subsidiaries have been combined into the following reportable segments: overnight air cargo and ground equipment in the accompanying condensed consolidated financial statements. Resignation of Executive Officer Effective December 31, 2003, an executive officer and director of the company resigned his employment with AirT. In consideration of approximately $300,000, payable in three installments over a one-year period starting January 12, 2004, the executive agreed to forgo certain retirement and other contractual benefits for which the company had previously accrued aggregate liabilities of $715,000. 13 The above mentioned cancellation of contractual retirement benefits reduced recorded liabilities by $715,000. The difference between the recorded liability and ultimate cash payment of $300,000 required the recording of a $305,000 reduction in actuarial losses, recorded in Other Comprehensive Income (Loss), a $90,000 reduction in intangible assets and a net $20,000 reduction in executive compensation charges included in the statement of operations. After accounting for the effect of income taxes, these transactions increased the company's reported net earnings from continuing operations by $12,000. The company also agreed to buyback purchase from the former executive officer 118,480 shares of AirT common stock held by him (representing approximately 4.3% of the outstanding shares of common stock at December 31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price). The stock repurchase will take place in three installments over a one-year period, starting January 12, 2004, and will total approximately $538,000. The repurchase of the former executive's stock will be recorded in the period that the repurchase occurs as treasury stock transactions. Critical Accounting Policies and Estimates The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company's estimates and assumptions, related to both continuing and discontinued operations could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The most significant estimates made by management include allowance for doubtful accounts receivable, reserves for excess and obsolete inventories, deferred tax asset valuation, retirement benefit obligations and valuation of revenue recognized under the percentage of completion method. Following is a discussion of critical accounting policies and related management estimates and assumptions necessary in determining the value of related assets or liabilities. Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable is established based on management's estimates of the collectability of accounts receivable. The required allowance is determined using information such as customer credit history, industry information, credit reports and customer financial condition. The estimates can be affected by changes in the aviation industry, customer credit issues or general economic conditions. Inventories. The Company's parts inventories are valued at the lower of cost or market. Provisions for excess and obsolete inventories are based on assessment of slow-moving and obsolete inventories, and the current level of sales from consignment inventory. Historical part usage, estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates. Estimates are subject to volatility and can be affected by reduced equipment utilization, the retirement of aircraft or ground equipment and changes in the aviation industry. Deferred Taxes. Deferred tax assets and liabilities net of valuation allowance, if any, reflect the likelihood of the recoverability of these assets. Company judgement of the recoverability of these assets is based primarily on estimates of current and expected future earnings and tax planning. Retirement Benefits Obligation. The Company currently determines the value of retirement benefits assets and liabilities on an actuarial basis using an appropriate discount rate. Values are affected by the Company's outside actuary's estimates of the expected return on insurance policies and the discount rates used. Changes in the discount rate used will affect the amount of pension gain or loss recognized in other comprehensive income. During the quarter ended December 31, 2003, the Company adjusted its deferred retirement obligation balance after reaching a settlement with a Company executive who resigned employment effective December 31, 2003 (see Resignation of Executive Officer). Revenue Recognition. Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers. Revenues from overhaul contracts on customer owned parts, certain labor service contracts and long term fixed price manufacturing projects are recognized on the percentage-of-completion method. Revenues for contracts under percentage of completion 14 are measured by the percentage of cost incurred to date, to estimated total cost for each contract or workorder; unanticipated changes in job performance, job conditions and estimated profitability may result in revisions to costs and income, and are recognized in the period in which the revisions are determined. Seasonality Global's business has historically been highly seasonal. Due to the nature of its product line, the bulk of Global's revenues and earnings have typically occurred during the second and third fiscal quarters in anticipation of the winter season, and comparatively little has occurred during the first and fourth fiscal quarters. The Company has continued its efforts to reduce Global's seasonal fluctuation in revenues and earnings by broadening its product line to increase revenues and earnings in the first and fourth fiscal quarters. Global is currently in the fifth year of a multi-year 1999 contract to supply deicing equipment to the United States Air Force, and has been awarded two large scale contracts, each of which the Company believes contributed to management's plan to reduce seasonal airport deicer fluctuation in revenues. However, as these contracts are completed, seasonal trends for Global's business may resume. The remainder of the Company's business is not materially seasonal. Results of Operations In August 2003, the Company completed the sale of certain assets of MAS totaling $3,006,000 for consideration of $1,885,000. The loss associated with this disposition is reflected in discontinued operations. The operations of MAS have been reclassified as discontinued operations and, therefore, are not included in the Results of Continuing Operations discussed below. Consolidated revenue increased $7,052,000 (23.0%) to $37,659,000 and $1,746,000 (15.5%) to $12,980,000, respectively, for the nine and three- month periods ended December 31, 2003 compared to their equivalent 2002 periods. The nine and three-month current period net increase in revenue primarily resulted from increased revenue at both MAC and Global, as described in the Overview section of Item 2. Operating expenses increased $4,879,000 (15.8%) to $35,675,000 for the nine-month period ended December 31, 2003 and $1,535,000 (13.9%) to $12,610,000 for the three-month period ended December 31, 2003 compared to their equivalent 2002 periods. The change in operating expenses for the nine-month period consisted of the following: cost of flight operations increased $496,000 (4.8%), primarily as a result of schedule changes which increased costs associated with airport fees, pilot salaries and travel partially offset by decreased fuel costs; maintenance expense increased $2,368,000 (32.3%), primarily as a result of increases in the cost of parts, outside maintenance and maintenance salaries, related to aircraft fleet modernization and route expansion; ground equipment increased $1,629,000 (22.2%), as a result of higher cost of parts and labor associated with increased Global sales; and general and administrative expense increased $407,000 (7.8%) primarily as a result of increased profit sharing accrual, the settlement of an executive employment agreement (see Resignation of Executive Officer), staffing, contract labor, rent and professional fees. The change in operating expenses for the three-month period consisted of the following: cost of flight operations increased $486,000 (13.5%), primarily as a result of schedule changes which increased costs associated with airport fees, pilot salaries and travel partially offset by decreased fuel costs; maintenance expense increased $1,688,000 (67.9%), primarily as a result of increased cost of parts, outside maintenance and maintenance salaries, discussed above; ground equipment decreased $770,000 (24.9%), as a result of lower cost of parts and labor associated with increased Global sales; and general and administrative expense increased $135,000 (7.7%) primarily as a result of the settlement of an executive employment agreement (see Resignation of Edecutive Officer), increased profit sharing accrual, staffing, rent, contract labor and professional fees. As discussed above, the current nine-month period's increased revenues and related operating income resulted primarily from increased production related to commercial equipment orders and a large scale airport contract at Global and increased service revenues in the air cargo sector. During the nine month period ended December 31, 2003 Global's revenue and operating income increased $2,782,000 (30.8%) and $1,222,000 (395.6%), respectively, to $11,809,000 and $916,000, respectively, compared to the nine months ended December 31, 2002. 15 Net non-operating income increased $340,000 and decreased $106,000, respectively, for the nine and three-month periods ended December 31, 2003 compared to December 31, 2002. The nine and three-month increases in non- operating income were principally due to a prior year loss on impairment of marketable securities, increased current period cash surrender value and a current year decrease in interest expense due to lower interest rates and decrease in average debt outstanding. Pretax earnings increased $2,513,000 and $316,000, respectively, for the nine and three-month periods ended December 31, 2003, compared to their respective December 31, 2002 periods. The nine-month increase was principally due to the above stated increase in air cargo and ground equipment earnings. The provision for income taxes increased $986,000 and $110,000 for the nine and three-month periods ended December 31, 2003, respectively compared to their respective 2002 periods, primarily due to the increased profits for the periods ended December 31, 2003. The effective tax rate for the nine-month periods ended December 31, 2003 and 2002 were, respectively, 39.8% and 33.9%, the lower 2002 period rate was primarily due to state income tax benefits. Liquidity and Capital Resources As of December 31, 2003 the Company's working capital amounted to $8,558,000, a decrease of $1,028,000 compared to March 31, 2003. The change to working capital included $300,000 payable to an executive officer, see Resignation of Executive Officer. The net decrease primarily resulted from decreased assets held for sale and accounts receivable and increased accrued expenses, partially offset by increased inventory and decreased accounts payables and billings in excess of cost and earnings. On August 31, 2003 the Company amended its $7,000,000 secured long-term revolving credit line to extend its expiration date to August 31, 2005. The credit facility contains customary events of default, a subjective clause and restrictive covenants that, among other matters, require the matters, require the Company to maintain certain financial ratios. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. Under the provisions of the revolving credit line, the sale of MAS as described in Note H. would be considered an event of default. The Company has obtained a waiver for this covenant. As of December 31, 2003, the Company was in compliance with all of the restrictive covenants. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement, which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. The credit facility is secured by substantially all of the Company's assets. Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at December 31, 2003 was 1.11%. At December 31, 2003 and March 31, 2003, the amounts outstanding against the line were $104,000 and $2,217,000, respectively. At December 31, 2003, an additional $2,116,000 was available under the terms of the credit facility. The Company has not currently, nor in the past, engaged in the use of structured finance arrangements, known as off-balance sheet financing transactions, with unconsolidated entities or other persons. The Company has classified the $104,000 outstanding balance on its credit line as of December 31, 2003 as long-term to reflect the terms included under the amendment signed on August 31, 2003. The respective nine-month periods ended December 31, 2003 and 2002 resulted in the following changes in cash flow: operating activities provided $881,000 and used $159,000, investing activities provided $1,734,000 and used $103,000 and financing activities used $2,221,000 and provided $312,000. Net cash increased $395,000 and $51,000 for the respective nine-month periods ended December 31, 2003 and 2002. Cash provided by operating activities was $1,040,000 more for the nine- months ended December 31, 2003 compared to the similar 2002 period, principally due to increased earnings and decreased accounts receivables, offset by increased inventory. 16 Cash provided by investing activities for the nine-months ended December 31, 2003 was approximately $1,837,000 more than the comparable period in 2002, principally due to proceeds from the sale of MAS assets-discontinued operations and marketable securities and decreased capital expenditures. Cash used in financing activities for the nine-months ended December 31, 2003 was approximately $2,533,000 more than the comparable 2002 period, principally due to a decrease in net borrowings under the line of credit in 2003 partially offset by a current period decrease in cash dividend. There are currently no commitments for significant capital expenditures. The Company's Board of Directors, on August 7, 1998, adopted the policy to pay an annual cash dividend in the first quarter of each fiscal year, in an amount to be determined by the board. On May 27, 2003, the Company declared that, due to losses sustained in fiscal 2003, no common share dividend would be paid during fiscal 2004. Deferred Retirement Obligations During the quarter ended December 31, 2003 the resignation of a Company executive resulted in a $715,000 decrease in the Company's deferred retirement obligation. Contractual death benefits for the Company's former Chairman and Chief Executive Officer who passed away on April 18, 1997 are payable by the Company in the amount of $75,000 per year for 10 years from the date of his death. Impact of Inflation The Company believes the impact of inflation and changing prices on its revenues and net earnings will not have a material effect on its manufacturing operations, because increased costs due to the currently low level of inflation can be passed on to its customers, or on to its air cargo business since the major cost components of its operations, consisting principally of fuel, crew and certain maintenance costs are reimbursed, without markup, under current contract terms. Recent Accounting Pronouncements The FASB has issued SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 was effective for the Company beginning April 1, 2003. Adoption of SFAS No. 143 did not have an effect on the Company's financial position and results of operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and amends Accounting Principles Bulletin (APB) No. 30 "Reporting the Results of Operations-Discontinued Events and Extraordinary Items". Along with establishing a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, this standard retains the basic provisions of APB No. 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity. SFAS No. 144 was effective for the Company beginning April 1, 2002. The effect of the adoption of SFAS No. 144 on management's plan to discontinue the operations of MAS is reflected in the Company's condensed consolidated statements of financial position and results of operations and is detailed in Note H Discontinued Operations in the Company's financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the 17 inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements, initial recognition and initial measurement provisions of this Interpretation are currently effective and did not affect our financial position and results of operations for the three and nine months ended December 31, 2003. The Company's ground equipment subsidiary warranties its products for up to a two-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known. As of December 31, 2003 the Company's warranty reserve amounted to $127,000. Product warranty reserve activity during the nine-months ended December 31, 2003 is as follows: Balance at 3/31/03 $116,000 Additions to reserve 111,000 Use of reserve (100,000) Balance at 12/31/03 $127,000 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to continue to account for its stock-based compensation under the provisions of Accounting Principles Bulletin No. 25. The Company has applied the fair value recognition provisions of SFAS NO. 123 to its stock-based compensation and has determined that there is no effect on net income and earnings per share for the three-month and nine-month periods ended December 31, 2003 and 2002 respectively. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This Interpretation requires that variable interest entities created after January 31, 2003, and variable interest entities in which an interest is obtained after that date, be evaluated for consolidation into an entity's financial statements. For variable interest entities created or acquired prior to that date, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 31, 2003. The adoption of FIN 46 is not expected to have an impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 is effective for the Company beginning July 1,2003, although FASB has recently proposed that implementation of certain provisions of SFAS NO. 150 be postponed indefinitely. The Company has determined that the adoption of SFAS No. 150 will not have an impact on the Company's financial position or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company does not hold or issue derivative financial instruments for trading purposes. On October 30, 2003 the Company terminated its remaining credit line swap for $97,500. As of December 31, 2003 the Company had outstanding no interest rate swap agreement to reduce its exposure to the fluctuations of LIBOR-based variable interest rates. Item 4. Controls and Procedures The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, and they have concluded that these disclosure controls and procedures are effective. 18 During the nine month period ended December 31, 2003, the Company made certain changes to its internal control procedures related to operations to enhance procedures to verify the independence of vendors and to periodically review nonstandard payment terms required by vendors. There was no change in internal controls over financial reporting during or subsequent to the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2003 3.2 By-laws of the Company, as amended, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 21.1 List of subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997 31.1 Section 302 Certification of Walter Clark 31.2 Section 302 Certification of John J. Gioffre 32.1 Section 906 Certification of Walter Clark 32.2 Section 906 Certification of John J. Gioffre _______________________ (b) Reports on Form 8-K No Current Reports on Form 8-K were filed in the three months ended December 31, 2003. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIR T, INC. (Registrant) Date: February 09, 2004 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: February 12, 2004 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 20 AIR T, INC EXHIBIT INDEX PAGE 31.1 Section 302 Certification of Walter Clark 22 31.2 Section 302 Certification of John J. Gioffre 23 32.1 Section 906 Certification of Walter Clark 24 32.2 Section 906 Certification of John J. Gioffre 25 21